What happens to the US dollars used to buy imports?
When we as US citizens use our income, whether labor or capital income, to buy a product from another country, those US dollars are remitted to a bank. Now the bank may be in the United States or in a foreign country.
If the US dollars are remitted to a foreign bank, that bank pays the exporter in local currency, and then sends those US dollars to that country’s central bank in exchange for local currency. The central bank of the foreign country then holds the US dollars in their Foreign Exchange Reserves.
The US dollars in the foreign exchange reserves can be used for investment anywhere, in Europe for example. Now Europe holds US dollars in their foreign exchange reserves.
What happens to those US dollars? Do they stay overseas? Do they ever come back? Some are used to buy our exports, but since we have a trade deficit, many of those US dollars remain overseas. This would result in an imbalance. However, through the Balance of Payments mechanisms, imbalances in the foreign exchange reserves can be corrected.
“When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.” (Wikipedia)
Thus, we see that those US dollars that leaked out of the US economy from purchases of imports by labor or capital are counterbalanced in various ways, including foreign investment in the United States, loans from foreigners and the actions of foreign central banks. One reason why a foreign central bank would use its foreign exchange reserves of US dollars is to protect its own currency.
The purpose of writing this quick post is to show that US dollars going to imports are not lost. They don’t disappear. There are mechanisms to keep them balanced within the global presence of the US economy. An accounting of the US economy that keeps track of those US dollars in foreign exchange reserves would be considered more complete.
With all due respect, this reminds me of bar bets. I learned at a very young age that the english language can be twisted in ways that I would never have imagined.
Here is our trade balances in millions of dollars from the Census Bureau 1984 to 2012
Year Balance
1984 -109,072
1985 -121,880
1986 -138,538
1987 -151,684
1988 -114,566
1989 -93,141
1990 -80,864
1991 -31,135
1992 -39,212
1993 -70,311
1994 -98,493
1995 -96,384
1996 -104,065
1997 -108,273
1998 -166,140
1999 -263,755
2000 -377,337
2001 -362,339
2002 -418,165
2003 -490,545
2004 -604,897
2005 -707,914
2006 -752,399
2007 -699,065
2008 -702,302
2009 -383,657
2010 -499,379
2011 -556,838
2012 -534,656
Those dollars may not be lost but purchasing power has been removed from our economy. Some of them have been used to build a larger Chinese navy.
And as our trade imbalances grew over those years, Americans’ wages stagnated, Americans slowly stopped saving and slowly started going into debt. So that by 2005 the personal savings rate was reported as -.5% and the Kennedy/Greenspan study reported that homeowners had extracted 577 billion dollars in equity from their homes that year alone
Also during that same time period the Fed was continually lowering interest rates to stimulate our economy. That ended when they effectively reached 0%.
I understand that “correlation is not causation”. But economics is the only field that I have seen that embraces that motto quite so jubilantly. In the engineering field, any correlation is checked out exhaustively before ignoring it.
Jim
so check it out exhaustively. look for cause and effect, and as Lambert reminds us, look for circular causes and effects.
currently, all this means to me so far is that we have bought more from them than they have from us. where did we get the money to do this?
why would they take the money if they don’t want to buy anything with it?
ask Lambert what he means that a foreign bank would use its dollar reserve to protect its own currency.
not all language use that you don’t agree with is “twisted” (though some that you do agree with most certainly is), but language is far more approximate than most people realize and a habit of asking questions and trying, desperately, to think in terms of what the words point at, rather than the words themselves will help us think more clearly.
Jim
well, let me make a start then (with apologies.. i know i don’t know anything, so if this is wrong..)
it seems to me that if “they” don’t want to buy as much from us as we buy from them, they end up with extra dollars they can’t use…
unless they lend them to us.
one of the best ways to lend them to us is to buy US bonds. the government gives them bonds and takes the dollars, which it uses to buy things it (we?) wants without having to raise taxes.
so, at first glance, it looks like “they” are paying our taxes for us.
now the day may come when they want to be paid back, but that is another question.
It is all part of the circular flow of US dollars out and then back into the US. The money is not lost. It returns when they buy US things, services, and invest in our country and businesses.
Where does the money not go? It does not go into the pockets of domestic producers. Their lost business and revenue means lost domestic jobs means lost income to the American consumer. This lost income means further lost jobs and lost revenue to domestic producers in vicious cycle until a new, depressed equilibrium is reached. It means the idling of factories and labor, wage stagnation and deflationary pressures, and increased debt, on the part of domestic manufactures and. domestic consumers.
See:
http://anamecon.blogspot.com/2013/04/more-on-negative-effects-of-trade.html
and references therein.
Just trying to follow the money in the modern global economy is like trying to follow the pea in the shell game, whereas you can drive through any Northern US city and see where the money is not going.
One of the main ways it comes back is deficit spending. Guess who buys a lot of the Treasury bonds that finance these deficits?
Well an issue I have brought up often, mostly in the form of questions (because to some extent I remain an economic peasant) is how to account for the role of U.S. dollars retained and exchanged outside the U.S for all kinds of purposes. For example many legal and illegal commodities from oil to cocaine are transacted in dollars and often enough actual pallets of Benjamins. To the degree that this external money supply exists it would seem to be an interest free loan to the U.S. economy. Maybe this is fully accounted for in M-1, M-2, M-3, as I said I am a peasant. But I would be interested to hearing from people in the know.
On a slightly more sophisticated level a certain amount of Foreign Held Treasuries will never be redeemed on net having roles similar to identical with those billions of dollars of Benjamin’s floating around among foreign drug and gun dealers. Whether those Notes and Bonds are simply being held as Central Bank reserves or as collateral for commodity trades denominated in dollars there is a certain amount of U.S. Total Public Debt that will not and perhaps cannot be redeemed on net and so to some degree is not effectively ‘debt’ at all, at least as to principal.
Now I don’t pretend to get all of Edward’s arguments about circular flow. They seem right but to some degree flow right over my head. But some of these arguments that imply that national accounts all just balance out in ebbs and flows often seem to ignore the stickiness of certain dollar denominated assets that are effectively permanently expatriated because of the U.S. role as a global reserve and commodity currency.
Or not. But as often as I ask I never get some informed discussion about what percentage of U.S. Public Debt is not really such. Because the world economy could not withstand its redemption without abandoning the dollars global reserve status. Can someone enlighten me?
On a related topic I have argued (at times pace Dale) that a large part of Social Security assets are properly considered not really ‘debt’ in that the system is designed to never go to zero (although under current projections it does so go). That is much like the need for a certain amount of dollar denominated instruments to maintain licit and illicit trade overseas, the legal need to keep a full year of reserves in Social Security in the form of Special Trasuries means those also are not in some sense real debt (though incurring real debt service).
That is the U.S. Public is not ‘really’ on the hook for all $16 trillion plus in ‘Public Debt’ and Greenspan wasn’t crazy when in 2000 he warned about the risk of the disappearance of the U.S. long bond in the face of then projected surpluses. But exactly WHAT percentage of domestic and foreign held Treasuries are ‘really’ debt never seems to get addressed.
But I am sure willing to listen should anyone put this variable into their money supply/foreign trade equations/equilibrium models.
Coberly, I am not an expert either. I understand that first Japan and then China wanted to hold dollars instead of their own currencies in order to keep their own currency values low. This provided a trade advantage.
I have been following Lambert’s website and I believe that some good could come of it. But not if the whole endeavor degrades into global accounting. It would make more sense to treat imports and exports as gates into and out of our domestic economy. Gates which could interfere with our circular flows.
As strange as it may seem today, before 1980 we believed that a primary responsibility of the federal government was to protect the domestic economy. Tariffs were a powerful tool to accomplish that at least to some degree. This meant that the American consumer did not get the lowest prices but they did get a stable economy.
But after 1980, there was a shift. Global Free Trade was to be a “rising tide that would lift all boats”. It became politically incorrect to use tariffs. Of course this theory allowed American corporations an additional advantage over those Americans who worked for a living because they could just move production overseas. And it allowed our trade partners to game the system with currency manipulation and/or government subsidies to their producers. In short Global Free Trade has the same problem, that Communism has, it depends on human beings and their organizations to act against their own short term best interests. In 2010 when Obama advocated for a 4% limit on trade surpluses, it was loudly rejected.
The verdict is in, Global Free Trade is not a “rising tide that will lift all boats”. Our trade negotiators and the Congress wrote blank checks to our trade partners and they have cashed them.
The verdict would have been in decades earlier, if the Federal Reserve had not regularly lowered interest rates to stimulate lending and spending. (Why didn’t they return interest rates back up to the previous high, after each recession?) That hid the effects of free trade on American worker/consumers. It worked until interest rates went to effectively 0% and the American consumers were in debt up to their eyeballs.
The facts mentioned in my first message did not happen in a model, they happened in the real world. The facts speak for themselves. In my opinion we changed our economic policies and the middle class suffered directly from that change.
My fear is that the damage caused by this free trade policy is continuing. And that our jobless recovery will continue far into the future, getting a little worse year by year.
It is an error to assume physical dollars must be used in the transaction.
If I have a dollar-denominated deposit account from which I draw to pay for imports, no actual currency flows to the bank. Rather, the bank’s liabilities fall, and then rise again with the foreign-currency-denominated liability when they credit the foreigner’s account.
Because their dollar-denominated liabilities fall, there is less need for the bank to hold bills. They *may* choose to trade them for foreign currency so as to have foreign reserves sufficient to back up the exporter’s demand for hard cash, but it need not be dollar-for-dollar of imports, if at all.
As above, it is quite possible that broad dollar-denominated money is destroyed via imports.
First, it is the U.S. consumer who is funding foreign savings, and not foreign savings that is funding the consumer. Treasury issuance has to do with alternative accounts at the Federal Reserve.
What happens when a U.S. consumer purchases a Foreign car? If the consumer pays cash, the consumer’s checking account in a U.S. bank is debited and the foreign carmaker’s account is credited, thereby increasing foreign savings of U.S. dollars. Total deposits in the U.S. banking system remain the same.
When a consumer borrows to buy the car the bank makes a loan to the consumer, creating a loan on the asset side of the bank’s balance sheet and a new deposit on the liability side. (Loans create deposits.) After the car is paid for, the Foreign car company has the new bank deposit. Note that consumer borrowing increased total bank deposits and funded foreign deposits (savings) of U.S. dollars. The widely held causal myth is that foreigners are funding U.S. consumers.
That’s what the trade gap is all about-the desire of foreigners to net save U.S. dollars and to sell goods and services to the U.S. to obtain those assets. If foreigners did not desire to save U.S. dollars, they would instead buy goods and services from the U.S. and there would be no trade deficit.
The problem with the trade deficit is that it reduces domestic net private savings. One way to offset this is for people to borrow from banks, or the federal government to deficit spend. The latter could go to more imports, but bigger deficits should drive the dollar down making our exports more attractive . Run a surplus, and you will get a strong dollar and bigger trade deficit.
I think Matt and I are largely saying the same thing, apart from Matt requiring the foreign account to be denominated in dollars.
Greg
the money does not go into the pockets of domestic producers because the domestic producers are not producing anything foreigners want to buy at the price.
maybe there is some evil manipulation going on that i don’t understand, but just saying that the money is “lost” seems to me to miss the fundamental fact that it is “lost” because we aren’t making anything anyone wants to buy.
otherwise it seems to me there is some confusion above about the difference between “accounting” and spending. the business of accounting is to make the books balance so you know where the money went or is coming from… for your purposes.
even if the money in the SS Trust Fund will never be paid pack… and by the way, we are talking about “money” here, not “currency”… it is still a debt. it makes a difference if you regard it as having to be paid back…. as it is, and does… from if you just erase it from the books or pretend that the people who lent you the money don’t have a claim to it. the fact of the TF never going to zero has not a damn thing to do with this.
one reason the SSTF will not go to zero is because of the interest being paid on the debt owed to it. one does not ordinarily pay interest on something that is not a debt.
another reason it will not go to zero is because it will not be allowed to go to zero because the money in the Trust Fund has value as a reserve. The people paying their SS tax “know” this, and they know that lending part of the money they pay in to the government helps maintain this reserve… that does not mean that the money lent to the government is not owed to the Trust Fund… that is, it is not “not a debt.”
another reason it is not not a debt is that it is there in case it is needed… that is, the debt can be called… as it has been and will be.
your grandfather might create a trust fund for you and “invest” it in government bonds. then he might advise you to “do what you want with the interest, but never touch the principle.” that advice does not make the government bonds “not a debt.”
My view is that money from imports going to foreign entities, debt, govt borrowing, trade deficits, drug money, SSTF etc… involve standard mechanisms of the economy. They are just mechanisms that get balanced in the circular flow.
Like the Tibetans say, everything is a medicine if taken in the right dosage. Everything can make you healthier if taken in the right dosage. But everything is a poison if taken in the wrong dosage.
What I look at are the imbalances. Have they reached a point of being poisonous.
Take what Matt said above, “The problem with the trade deficit is that it reduces domestic net private savings.” In a balanced dosage though, this is not a problem. The trade deficit dollars come back and get invested anyway. And if they get invested for increasing productive capacity, all the better.
But Matt’s statement implies an imbalance, and I agree with him. Trade deficits have reached a “dosage” of really hurting domestic net private savings.
I am getting a post ready that will show what has happened to personal savings since the 80s. In the 1st quarter 2013, labor saved less in real dollars than in 1985, even though real GDP increased since then. The post will also show the percentage of capital income used for consumption now as opposed to the past. An unhealthy balance has developed over the years.
“The trade deficit dollars come back and get invested anyway”
I still fail to see any justification for this assertion.
As far as I can tell, import dollars may destroy dollars and create financial liabilities on domestic balance sheets. At some point– presumably– the foreign owners of the corresponding financial assets will demand real assets in return for removing the domestic financial liability. So why does it make sense to say the “import dollars” continue to circulate domestically in the current quarter or year if the liability doesn’t get retired until ten, fifteen, fifty years from now?
I realize, of course, that it works the other way with exports, so many of the domestic liabilities will be retired quickly. So insofar as there are current exports to balance the current imports that may be the case. But trade deficit dollars need not “return” to circulate any time soon.
What am I missing here?
Perhaps the first step is to clarify what you mean by “dollars.” Are you referring to physical currency– coins and notes? Are you referring to dollar-denominated financial assets? Are you referring to all financial assets?
That would probably help me, anyway.
DR, I agree and the dollars at the fed are held in dollars and nothing is stopping foreign entities from selling their dollars. One example is the Chinese and the currency peg where they want or need to hold their dollars.
Ed, yes an imbalance can occur as it did in 2006-2008 where the trade deficit was 6% of GDP and a budget deficit of about 1% of GDP – discussed the latter with Warren Mosler and he stated that was an imbalance that could not support the credit structure of the economy – thus big deficits would have followed regardless to bring the balance back. But is dies not automatically mean an imbalance.
One more. I agree with DR, it does not get invested. The trade deficit does not in any way affect how the federal budget is formulated. If the trade deficit shrank tomorrow congress would not alter the budget one iota. Bonds or reserves are Just a parking place for foreign dollars. I ever stop with my excessive travel I can create a brief post on it. Maybe this comment suffices.
Don’t confuse a static (equilibrium) system with a dynamic system. Edward is discussing a system in equilibrium (input equals output). In a dynamic system you can have accumulation or depletion also. For example, in a dynamic system dollars in and out of the foreign sector do not have to be equal as they are in a system in equilibrium.
He is making an approximation of the circular flow of money by assuming equilibrium. Don’t expect it to exactly describe a dynamic situation, but it can give you insights into what is happening.
Jerry,
I don’t think that’s right. At least, I’m giving EL more credit than that. If what you say is true, then EL’s logic is simply circular.
EL needs to clearly explain why the flows work the way they do in order to explain why his results are interesting.
It’s easy to write out a bunch of numbers and do the accounting. (If you can do the accounting, anyway.) But that won’t tell you what happens when one of the pieces change.
But you’re missing one more important point. The *flows* in the model must be in equilibrium, not the dollars. Once the foreign sector is in the model (as opposed to inside the open economy we are investigating) then the model is closed, and the flows in and out of the foreign sector need not be equal so long as there are counterbalancing flows elsewhere. The domestic economy can be bleeding net assets when the flows are in equilibrium. It just requires the foreign sector to accumulate.
I guess we can let Edward answer that question, but he has stated his model is in equilibrium.
I think we are still defining terms and have not come to a common consensus. Until we do, we cannot have a common understanding.
Jerry
i don’t think its so much a matter of “defining terms” as it is of actually knowing what we are talking about. What actually happens to dollars used to buy imports. And what happens when those dollars are not used to buy what we make. There are real world answers to these questions,
It may be a matter of both. Also, we need to understand what the model does and does not do. Don’t expect it to do something it is not designed to do.
Jerry & Coberly,
The model simply keeps track of those US dollars. They still belong to the US economy, which the circular flow describes.
I sent DR my spreadsheet model because he said he could improve it. He sent it back with his corrections. He completely took out imports and exports. I suspected that his way would not be able to make the numbers fit. His version of the model also left out the US dollars that go overseas from buying imports.
My model is the correct way to do it. No numbers are lost, and they all flow as they should. Now I could make a separate column for domestic saving and another for foreign saving of US dollars, but it seems unnecessary, because both forms of saving end up flowing through the US financial system.
EL, I would have appreciated it if you had written back to me on any of these concerns. I could have clarified.
The numbers I sent you made perfect sense. It’s just that I have a functioning foreign sector.
I cannot possibly respond to your concern about US dollars going overseas except to reiterate my previous concerns. Until you clarify what you mean by “US dollars” and why, if the “go overseas” that means that they are “saved” by anyone besides the people who own them… “overseas”
I don’t understand how you can pass judgement on what I sent when you refuse to work with me to reach common definitions on the words we use. I don’t understand what you are trying to say, and you won’t tell me, so I cannot possibly (yet) accept any criticism of what I have done.
Can you please tell me what “dollars” you are trying to track? Can you please explain to me why these “dollars” can neither be created nor destroyed? Can you please explain to me why these “dollars” cannot be saved by foreigners?
Let me see if I understand this correctly.
At equilibrium, if there is a flow of 100 “dollars” overseas, then there is another flow of 100 “dollars” back into the US. These 100 “dollar” flows are not necessarily the same “dollars”.
There may very well be a pool of “dollar” sitting overseas, say a pool of 1000 “dollars. At equilibrium, 100 “dollars” flows in, and a different 100 “dollars” flows out. That is what the model is showing. It says nothing about what is happening to the pool of 1000 “dollars”. It doesn’t even say how big the pool is. It only says that the flow into and out of the pool is the same so that, at equilibrium, the size of the pool is not changing.
Jerry,
What are *you* calling a “dollar?” We’re never going to get far until we can agree on what a “dollar” is.
When you say “flows in” and “flows out” do you mean in and out of the foreign pool of “dollars?”
These are important questions because based on the answers it may or may not be possible to both equilibrate and run a trade deficit/surplus.
Jerry,
That’s right. Remember there are stocks and flows in the circular flow. The stock of US dollars overseas never reaches zero because money flows in before all the money would come back. Yet, the balance of payments mechanisms seek to keep the flows zeroed out over time.
It’s like being at a party where the host keeps topping off your drink before you can finish it. That is being a good host. : )
Right. The BoP must zero out. But that doesn’t require equilibrium. That’s an accounting matter. If you do the accounting properly, it’s impossible to make the BoP nonzero.
If I import something, that simultaneously increases the current account deficit (I get a currently-produced good or service) and the capital account surplus by the same amount (a foreigner gets some asset or retires some liability) There is no need to wait for the asset to flow back.
The problem is that if I consume what I just imported, I gave up an asset and wind up with nothing (well, nothing I can trade, anyway.) We usually call that “dissaving.”
“dollars” are dollars in any form, solid or electronic.
Flows in and flows out are total dollar flows in and out of the US, not only imports and exports.
Jerry,
In that case, why can’t I pay for imports in yen? Where do my dollars go if I don’t use dollars? If we are following the flow of dollars, then does it not count as an “import” if I pay in foreign currency?
Interesting question. I don’t know how or even if the model can handle that kind of transaction since it is tracking dollars, not yens. Edward?
Paying for imports from Japan with Yen? Well, let’s see…
Wouldn’t one use US dollars to purchase the Yen? We are back to the foreign exchange market, where the financial sector keeps track of the balance of payments.
In my travels, sometimes I pay for things in other countries using US dollars. Then the people I pay take the money to the currency exchange office to receive their own local currency. Even in this case, the US dollars end up in foreign exchange reserves.
Why would I need to purchase yen? Cannot I own a stock of yen upon which I may draw as I desire?
How were the yen obtained in a way that did not involve the exchange of dollars?
Bought ’em fifty years ago.
Traded my house for ’em.
D R:
You sold your home purchased in what? A trade is a sale. $ or Yen? Where was your house?
Did a job for Sony.
D R:
Snippets of information in a continuous paragraph? Come on, make your case . . .
I was born in Japan and moved to the U.S.?
Coberly | August 21 10:57 am
I said lost to US producers. The money is still out there, in foreign and US banks. Trillions of dollars. But there’s only two ways it can come back. Buying goods produced in the US, or buying US owned assets, that is assets owned by Americans. To put it another way, there’s only two ways that money can ultimately be spent: Buying US goods, or buying US assets. There’s no other place to spend it. It eventually HAS to be spent in the US. It is a debt, that can only be collected on in these two ways. Well, US services, also.
Well, it either circulates in the world, (and the US dollar is the reserve currency) or it comes back to the US.
Well, you say, the US banks can always lend it out. But why should they? US consumers are maxed out, still, mostly, and most US industry is depressed, and so not a good investment. And the depressed state of US industry is also why it’s not a good asset buy.
And even if the banks did lend it out, its worse than a wash, because loans have to be repaid, with interest. So the long run effect of lending to consumers is to depress consumer demand. Which we see. Lending to US producers is useless. They can’t expand production because consumer demand is depressed.
As far as I can tell, trade theory only accounts for balanced trade. It doesn’t account for the hoarding of trillions of US dollars and the refusal to spend it. Evil manipulation, if you will, because by forcing a trade deficit on the US, the Chinese grow their own economy, and depress ours. See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html It’s modern day mercantilism.
This is why the Chinese economy is now faltering: The US market has been fully exploited by them, and the Chinese can no longer expand their trade surplus with us, and not only us, but the rest of the world.
And why do the Chinese refuse to spend their US dollars? Because that would promote US industry, and because they haven’t developed their own domestic market, this would be at the expense of their own industry.
And how do they develop their own market? Pay their workers more. But that would make them less competitive, and the US more competitive.
In any event, D R, the amount of money you are talking about is minimal in the grand scheme of thing and will have a minimal impact on the model numbers, and no impact on the conclusions.
That’s unfair, Jerry.
I argue that the use of actual dollars in importing is minimal. Most trade surely happens through bank deposits/liabilities. At least hard currency goes somewhere (unless melted down or burnt.) Bank deposits may come into existence and then disappear forever.
Surely trades happening through bank deposits/liabilities are accounted for by the model. Such trades are a transfer of “dollars” albeit electronically. It is the way I pay most of my bills. I don’t send dollar bills…or gold coins. Do you?
Jerry,
Yes, for domestic transactions. No, for international.
Strictly speaking, for domestic transactions, you destroy dollars when you drain your deposit account and the bank creates dollars when it credits the other party. But when the other party is foreign, it need not create dollars, but may credit an account denominated in foreign currency.
Ahhh! Here is a point of clarification that I need. D R, you said,
“But when the other party is foreign, it need not create dollars, but may credit an account denominated in foreign currency.”
Edward explains it as dollars going to the foreign seller who then turns it into local currency. Dollars are exchanged, not destroyed.
You have the conversion of dollars to local currency as a one-step process.
Edward has the conversion of dollars to local currency as a two-step process.
I think the difference is that you say dollars are destroyed in one place, then resurrected in another. Edward talks about transfer of dollars.
With electronic transfers, I can see dollars leaving and another currency arriving. The model would appear to leave those kind of transaction as dollars in order to balance the accounting. But where do they exist? Is there even a dollar account?
Interesting…and I am getting way over my head.
Jerry:
At Bosch, we would call it $ to Deutsch Mark in the early eighties.
Ah.
I’m talking about electronic transfers. Well, I guess it could be done on paper with a phone call as well, but that’s beside the point. The point is international transactions are probably done this way quite a lot.
And that’s why we don’t normally track dollars so much as we track assets. There are pretty much never a fixed number dollars available in the economy, because banks can (typically) create dollars just by crediting you with dollars. The catch is they have to assume a liability as well, so they create another financial asset (a loan) which they claim as an asset, and you accept as a liability.
Sorry, run. Didn’t mean to set you off.
I was coming up with different ways I could have a stock of yen apart from purchasing them in the current period.
You don’t think I could have sold my house for yen last decade?
D R:
When I convert Euros to $, I use the conversion factor at the Exchange and also a conversion to account for the fee to exchange. In any case I am accounting for the conversion as based upon $.
When I ship product from China to the US, I do a similar conversion to be declared at Customs. I do the reverse conversion when I ship raw materials to China and declare.
In any case, you are going to convert to $ once you are in the US. Try spending a Loonie at a store in the US, a yuan renmin, a yen, a Euro, etc. You are going to convert to $ once in the US and convert to the local currency in a foreign country.
D R:
What was you home purchased with?
Run,
I fail to see your point. If I import something from Sony, my “dollars” get debited from my account and Sony gets credited theirs credited with yen. Of course it happens at the going rate of exchange (apart from your fee… but that’s a whole different thing– either a service import if you are foreign, or a consumption of domestic service if you are domestic)
Point is, Sony never has to spend anything in the U.S. They don’t *have* to have dollars which they need to sell. Even if they do have dollars, they don’t have to do anything with them for millennia. I don’t see what difference it makes.
Re: my home
What difference does it make?
I include Treasuries in base money – call it currency dollars or whatever . If you buy a product from Sony they may choose to hold dollars instead of yen.
Matt…
I did not say they cannot hold dollars. I merely say they need not.
Run…
For argument’s sake, I took out a $200,000 mortgage (100% of the purchase price) and paid no closing costs. Again, for the sake of argument, the seller was in the clear.
So the bank credited the seller with $200,000, and assumed a $200,000 liability. At the same time, the bank created a loan document saying I owe the bank $200,000 plus interest. Where did I get the dollars to buy my home? Nowhere. Yet the seller wound up with an extra $200,000.